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How Will Collections Affect My Ability to Buy a Home?

Deanna Templeton

We recently received a question from a reader who’s planning to purchase a home in the near future and is worried that a record of charge-offs on her credit report could hurt her chances of qualifying for a home loan:

Hi. I plan on buying a home in 6 months, and have more than 20% for a down payment. The problem is that on my credit report I have two charge-offs. How will this affect me applying for a home loan?

Having a record of a charge-off or collection doesn’t necessarily mean you won’t qualify for a home loan. Every mortgage lender will vary, but in most cases, the lender will likely want you to address any unpaid collections or charge-offs before they approve or close on the loan. In some cases they may make exceptions, but much will depend on the mortgage loan program, the amount of the unpaid debt, the reason the debt wasn’t paid, and the lender’s individual policies.

From a credit qualification perspective, most lenders follow the mortgage guidelines under Fannie Mae and Freddie Mac, so you’ll want to aim for a minimum FICO score of 640 to insure that your credit score doesn’t hurt your chances of qualifying. With that said, the higher your score the better, so if you want to get the best interest rate and terms the lender has to offer, aim high. FICO scores in the 760+ range will often get you the best deal with most lenders.

If your credit scores are solid, and the charge-off accounts have already been paid or settled, you shouldn’t have a problem qualifying from a credit standpoint. Having said this, it’s also important to understand that credit scores are not the sole determining factor in whether or not you qualify for a mortgage. Lenders will also take into account other variables, including your employment history, your income, your debt to income ratio and your down payment.

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